Pearson (LON:PSON) unfortunately has underscored what many investors suspected was the folly of getting out of the media business entirely. Whilst not growing fast enough it was at least cash-generative and relatively stable. Instead, the group’s decision to recast itself as a pure-play 21st century educational publisher could scarcely have been timed more inauspiciously, though some of Pearson’s troubles are also beginning to look like fumbles.
For instance, a business that is at least partly, tacitly, dependent on an inactive labour force in the states was never going to be sustainable. At some point, workers who had been opting to continue education instead of looking for work were going to switch horses, and that’s what happened.
The resultant 30% slide in quarterly education revenues is perhaps more than management could have been expected to foresee. But investors can rightly question the effectiveness of the group’s self-help measures, assuming it showed much foresight at all. Investors will also struggle to see how the threat from the second-hand and rental course market was a new one.
Further bumps in the road back to a sustainable U.S. education business had always been inevitable, given well-flagged disruption from the move to digital delivery. Even so, the £180m profit ‘miss’ now expected in the group’s forthcoming financial year is alarming–implying the return of profitability to levels last seen more than a decade ago. Market forecasts had been creeping below official guidance for months, but the operating profit downgrade implies investors were still more than 70% wide of the mark.
Further underlying concerns are exacerbating the punishment of Pearson’s shares this morning, helping to account for their 26.5% slide, and suggesting that the stock is not quite at a floor yet. These include confirmation that the dividend, which has looked at risk of going ‘uncovered’ since final quarter of 2015, will need to be “rebased”, and that the stake in Penguin could be sold into a buyer’s market.
Few investors will doubt that another tough year for the group is now in the offing, after the stock completely erased gains made into the middle of last year. Unfortunately for investors, prices around 400p, last seen at the turn of the previous decade, are beginning to beckon.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.